No one expects Andrew Ross Sorkin’s slavish “Deal Book” lackeys to demand that the elite Wall Street bankers whose frauds drove the financial crisis be imprisoned, but the slavishness to the banks revealed when major news stories emerge continues to irritate if not surprise. A recent embarrassment can be found here.
The “Deal Book” Spinmeisters
The context of the NYT article was the expected settlement between DOJ, various states, and JPMorgan. The spin comes fast and hard, which would be great in cricket (or quarks) but, sadly, exemplifies the national paper of record’s “Deal Book” devotional pages. The “Deal Book” shows that cricket masters can impart very different spins. The first substantive paragraph’s spin is to minimize JPMorgan’s fraud.
The U.S. Attorney for the Eastern District of California is Benjamin Wagner.
“Once the U.S. government built a case against J.P. Morgan and settlement talks began, the Justice Department made several threats that it would file its civil lawsuit, and each time J.P. Morgan responded by offering to talk more or increase the amount of money it might pay, the people familiar with the discussions said.
One critical moment came as the department set an internal deadline, Sept. 24, to file a suit against the bank.
The day before the deadline, the bank offered to pay $3 billion to settle a case tied to mortgage-backed securities—an offer the attorney general rejected. That same day, Ben Wagner, the U.S. attorney from Sacramento, Calif., flew to Washington with two large charts he meant to display at a news conference describing the bank’s alleged misconduct. A criminal and civil investigation into J.P. Morgan’s past sale of mortgages bonds had been handled by Mr. Wagner’s office.”
The ongoing U.S. crisis was driven largely by financial derivatives. Nine of America’s systemically dangerous institutions (SDIs) failed or had to be bailed out – Bear Stearns, Lehman, Merrill Lynch, Fannie, Freddie, AIG, Countrywide, Wachovia, and Washington Mutual (WaMu). The SDI failures were primarily due to losses caused or aided by the sale and purchase of enormous amounts of fraudulent derivatives, and deregulation, desupervision, and de facto decriminalization proved exceptionally criminogenic. The Commodities Futures Modernization Act of 2000 and the Gramm, Leach, Bliley Act of 1999, respectively, made credit default swaps (CDS) into a regulatory black hole and repealed the Glass-Steagall Act’s prohibition against banks mixing commercial and investment banking. Continue reading →
Jamie Dimon is the smartest U.S. banker – as he, the Senate banking committee, the media, and President Obama told us. They told us this in the context of Dimon’s bank, JPMorgan, suffering a huge loss due to (if Dimon is to be believed) his top lieutenants’ stupidity. We are told that Dimon is the smartest banker because he ordered JPMorgan to sell its collateralized debt obligations (CDOs) (“green slime” “backed” primarily by endemically fraudulent “liar’s” loans) at the end of 2006 and close its special investment vehicle (SIV). Continue reading →
Jonathan Macey is one of the world’s most vitriolic opponents of effective financial regulatory cops on the beat. Those regulatory cops on the beat are essential to prevent a Gresham’s dynamic. When cheaters prosper markets become perverse and bad ethics drives good ethics from the markets. Macey’s argument relies on his assertion that we do not need financial regulators because he asserts that the industry is self-correcting because its officers are reliably dedicated to the interests of its customers due to their desire to maximize their executive compensation. His desired anti-regulatory policies have by and large triumphed over the last 30 years, producing the increasing criminogenic environments that drive our recurrent, intensifying financial crises. His assertions have been repeatedly been falsified by reality in those crises, but the worse his predictions fare the more dogmatic and snide he becomes in attacking those whose predictions have proven correct.
The usual apologists have rushed to the defense of Jamie Dimon, JP Morgan Chase’s CEO, after he announced that JPMorgan lost over $2 billion on purported hedges. The academic apologist-in-chief, Yale Law’s Jonathan Macey, is outraged that anyone is concerned about these matters. Macey, channeling Dimon’s flacks, asserts that the facts are as follows:
“The sole purpose of hedging is to reduce risk. The particular trades that J.P. Morgan was making were designed and intended to protect the bank’s balance sheet against losses from its exposure to the apparently increasing risk of some of its European assets, including approximately $15 billion in European distressed debt.”
My prior column explained why the purported hedge was not a hedge but a speculative investment in derivatives in contravention of the purpose of the Volcker rule. This column makes two more basic points. First, if JPMorgan’s “sole purpose” was “to reduce risk”, particularly of “$15 billion in European distressed debt” – why didn’t it sell the distressed debt? That would have eliminated the risk, which is far better than “reducing” risk. A true hedge would lock in any loss in the “European distressed debt” so the vastly better strategy if JPMorgan’s “sole purpose” was to “reduce risk” was to sell the inherently extremely risky assets. Even a true hedge is rarely perfect and has some risk of performing poorly, so selling “distressed” assets was unquestionably the superior alternative if one believes (and I don’t) Macey’s assertion that JPMorgan’s sole purpose in dealing with the distressed debt was minimizing its risk.